Monday, 11 November 2013

Service Costing Techniques

I get a call from a friend and the conversation goes somewhat like this:

R: Hey can you tell me how do I send a quote to a potential client for my services?

Me: I would be happy to write a blog post dedicated to you for this.

So as promised, I try to explain this while heavily depending on our work experience and our past advices to our IT clients:

Firstly let me make it clear that this is not a one size fits all solution. Service costing is a very very unique concept and it's not same for every business. It differs from service to service and also probably from company to company. 

This blog only gives certain criteria that have to be taken into consideration while quoting:

In my opinion these three factors should be considered while drawing up a quote:

A) Labour and Material Costs
B) Overheads
C) Profit expectations

Each concept in detail:

A) Labour and Material Costs

While quoting write down all the estimated expenses you will incur for providing the particular service. For typical service provider, a part of the work is off loaded to a sub-contractor. So obtain the costs of the sub-contractor. Some services require purchase of some softwares: obtain their costs. You might need some manpower. Estimate the number of human resources needed and their associated costs. If you are a freelancer then you need to put a cost to your own labour. Estimate the time you would be putting in. Obtain information from sources in industry as to the level of "salaries" paid to a person with your experience and expertise. Gather all costs and add them up.

The above activity will give you a brief idea of your "expenses". Mark this group as "1". You will notice that "1" forms a significant part of your "expenses"

B) Overheads

Overheads are expenses which are indirect in nature. Few examples could be: travelling expenses, hotel lodging boarding, telephone, internet expenses, printing stationery etc, rent if any, electricity etc. Mark this group as "2"

C) Profit

Profit is the income post all the expenses. When calculating the price of a service, profit is applied in same number as markup on the cost of a product. For example, if your labour costs are ₹200 and you plan to net 20% before taxes on your gross sales as profits, then you will have to apply a profit factor of about 25%  to your labour and overheads. Mark this as "3"

Bid price= 1+2+3

We have adviced few clients to determine their overheads and double the same to arrive at "bidding price" and this advice has proved to be quite successful for many IT companies in our client list. 

To conclude:

Pricing is a very time consuming activity. Some people "guess+estimate" while arriving at the right price for bidding and it seems to be working for them. Although we always advice for a scientific way of arriving at costing but few people choose to go with their "instincts"

If you not experienced then costing could be a difficult activity for you. If you quote too low, it might affect your enthusiasm and quality, if you quote too high, you might lose the bid and potential loss in profits. 

Therefore learn to calculate your costs properly, estimate overheads and develop a knack of arriving at the right bidding cost.

Reach us for a more customised solution for your service/product costing techniques.

Hope it solves your queries Mr. R.

Ashutosh Muglikar

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